Where To Look For Money
New owners struggle to obtain money to keep their businesses going. Some apply for numerous credit cards and consistently transfer balances between accounts to help with cash flow. Others drain their savings accounts and some apply for bank loans using personal assets as collateral. It is not easy to get a loan for a small business startup. Due the high small business failure rate, these loans are considered very high risk. I started each of my businesses with personal money or “FF money,” money from family and friends.
Qualifying for a Small Business Administration Loan (SBA) can be difficult. The major banks I contacted expressed how they bundle their own loan products around an SBA loan. Since the SBA does not lend money directly to small businesses, certified SBA banks determine if they can handle the business’ risk.
For small businesses the SBA guarantees a portion of the loan and has specific requirements for the owners to qualify.[i] When I interviewed a major SBA lender for the specific qualifications required to obtain an SBA loan, they informed me their requirements were slightly different than that of the SBA. They stated they had their own version of an SBA loan that required stricter qualifications.
When my three-year-old travel agency applied for an SBA loan at a major certified institution, I was again told the same thing. Although I passed all of the SBA requirements, they felt I was still too high of a business risk to provide me with the loan. They considered selling travel a very risky business.
In all my businesses I started with “FF money,” along with my personal savings and assets. But Beware. If you cannot pay back these loans, you may lose friendships and have a strained relationship with family members. Don’t ask for more than you need and be honest about the length of time it may take to reimburse them. My first business loan was guaranteed by a family members’ real estate.
At the end of my first year in business with my management consulting firm, I connected with an investor to help fund a growth plan. Although my business was successful and profitable, he turned me down. He told me my assets walk out of the door every day. In consulting my key assets were employees. He felt if I could not retain my employees to sell further consulting services, I could be quickly out of business. It’s easy for anyone to start a consulting firm and compete against me. Without the use of outside loans, I made many personal financial sacrifices to fund my firm’s growth plan.
One of my company’s had an extensive line of credit backed by the business’s assets and not a personal guarantee. I received this loan by accident. This business had a checking account with a large major bank. When I developed the banking relationship, I didn’t bother asking for a line of credit. Two years went by and the bank manager phoned begging me not to close my account at his bank. I didn’t know what he was talking about. I let him ramble until I could grasp a better understanding of this one-sided conversation. Finally, I connected the dots.
At that time, I had two different companies with checking accounts at this same bank. Company Number One, was a two-year old consulting firm with deposits of over one million dollars a year. Company Two, a training business, had an account that was only a few months old with much smaller deposits. The bank branch manager saw my partner from Company Number Two visit the bank to obtain some documents. He mistakenly thought she visited the bank to close both accounts and he did not want to lose the major million dollar deposits they held on account for Company Number One. I realized he called to offer me a line of credit if I kept my accounts at his bank. That’s how I received a line of credit with a bank by mistake.
I accepted his offer of a $500K line of credit and guaranteed it with both personal real estate and the assets of the business. Although I didn’t need the cash, I felt it was best to have another safety net. One year later, after I established a good credit history with this line of credit, the bank removed my personal guarantee and used 100% of my company’s receipts as collateral. By that time, my company was generating over $7 million per year in deposits with this bank.
Many years later this same bank lulled me into thinking my credit line would continue as long as I never defaulted. During the mid 2000s, when my company was with this bank over ten years, I received a call from my accounting department informing me the bank’s loan officer wanted to speak with me personally before they would allow my bookkeeper to draw from the line to cover an upcoming payroll.
At the meeting, I learned the bank had concerns over my company’s shrinking deposits. Although I explained, even with lesser annual receipts, my business was still profitable and met all of their requirements for collateral. They asked how much equity I had in my personal home and requested I use it as collateral in addition to the assets of the business. If I met this condition, they would continue my line of credit. I had no choice but to comply if I wanted to make the upcoming payroll.
Later in 2008, some of my major clients filed bankruptcy. When the housing market collapsed, I was left holding the bag. It wasn’t until I saw the movie, “The Big Short”, I learned how risk departments of major banks were preparing to protect their assets in anticipation of a mortgage collapse. Unfortunately, this bank did not warn me. They protected themselves instead of me. With my clients filing bankruptcy or divesting their businesses, there were no other options left for me to borrow money to meet my company’s cash flow needs. I too filed bankruptcy.
Darlene Ziebell brings over 40 years of experience in business consulting and entrepreneurship. Her methods are based on a unique blend of large enterprise strategies and the battle scars she acquired in four businesses including startups, mergers, ESOP, acquisitions and partnerships. One of her many endeavors was a business management consulting firm with a client base representing 20% of the Fortune 1000. She is an advisor to business owners training them on successful growth strategies through her Empowering Entrepreneurs methodology. Research her new book, A Dozen Avalanches Threaten Small Business, for more information.